China factory activity stabilizing - HSBC Flash PMI

BEIJING (Reuters) - China’s factories posted their best performance this year as a measure of new business rose from multi-month lows, a private sector purchasing managers survey showed on Monday, though overall activity still contracted for a sixth successive month.

Readings for output and export orders also perked up as the HSBC Flash Purchasing Managers Index (PMI) painted a picture of a stabilizing factory sector and supported the view that China’s growth rate bottomed out in the first quarter of the year.

“The index pointed to a slower pace of deterioration than in March, largely reflecting slower rates of decline of manufacturing production and new orders,” said Markit Economic Research, which publishes the index.

The overall index, the earliest indicator of China’s industrial activity, recovered slightly to 49.1 in April from a final reading of 48.3 in March, but still below the 50 level -- signifying contracting economic activity.

It was the strongest flash, or preliminary, readout for four months, and if confirmed would also mark a four-month peak for the final reading.

The HSBC manufacturing PMI index has not been consistently above 50 since June 2011, although it is far above readings in the low-40s struck during the depth of the global financial crisis in late 2008 and early 2009.

The new orders sub-index, which carries the heaviest weighting of the five components making up the overall PMI, bounced to 48.9 from the four-month low seen on the March flash index. It was just behind the reading for the output index, which also failed to rebound past the 50 mark.

“We believe this reinforces our view that economic growth bottomed in Q1,” Zhang Zhiwei, chief China economist at Nomura in Hong Kong, said in a note to clients.

“Nonetheless, the flash PMI remains below 50, which indicates a rather moderate recovery. We still expect monetary and fiscal policy to be loosened in Q2.”

An index reading of 50 marks the line between expansion and contraction of activity, according to the methodology of the survey compiled by British-based Markit. HSBC, the survey’s sponsor, believes a reading of 48 signals a level of industrial output consistent with economic growth above 8 percent.

Market reaction was muted, with Asian equities paring losses slightly but remaining down on the day, while the Australian dollar, sensitive to data from the country’s biggest single export market, briefly ticked up.

NEW EXPORT ORDERS

The uptick in the index indicates an acceleration of manufacturing activity compared with lows at the beginning of this year, helped by new export orders. That sub-index signaled a very slight contraction as it delivered its strongest reading since January.

“This suggests that the earlier easing measures have started to work and hence should ease concerns of a sharp growth slowdown,” HSBC’s China chief economist, Qu Hongbin, wrote in a statement accompanying the release of the survey.

China’s official PMI hit an 11-month high of 53.1 in March and saw an uptick in exports and new orders. That survey includes more state-owned firms in its results, while Markit captures more credit-constrained private firms in its survey. The two surveys also have differing methodologies for seasonal adjustment.

Some analysts say the official survey has a better track record of flagging economic turning points.

China’s annual rate of GDP growth slowed to 8.1 percent in the first three months of 2012, down from Q4 2011’s 8.9 percent.

That was below consensus forecasts but above the most bearish investor calls, leading many analysts to believe that the downswing in the world’s second-biggest economy may have bottomed out.

The consensus view is that the risk of a hard economic landing for China has now largely passed.

Still, China continues to struggle with overcapacity in most manufacturing sectors, including steel, plastics and textiles, thanks to manufacturers’ strategy of expanding as rapidly as possible to maintain market share as well as their need to produce as much as possible to maintain cash flow.

The survey noted that, while new orders appeared to be stabilizing, backlogs of work had not risen.

Meanwhile, the employment index rose only marginally from a three-year low in March. That could push China’s leadership to deliver on the policy easing that is being priced into markets to avoid the possibility of social unrest.

Economists in a Reuters poll last week forecast that China would cut the level of cash the country’s big banks must hold as reserves -- the required reserve ratio (RRR) -- by 150 basis points by the end of the year to keep money supply and credit growth steady to cushion an economy on track for its slowest full year of growth in a decade.

The purge of popular politician Bo Xilai, who headed the giant inland city of Chongqing, raises concern that a power struggle at China’s highest leadership levels risks seeing dissatisfaction among the people break out into the open.